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November 12, 2012

Multi-channel, collaborative approach is the key to ancillary revenue growth

Airlines are forecast to benefit from an 11.3% increase in ancillary revenue for 2012 worth more than $3.6 billion, according to the third annual Amadeus Worldwide Estimate of Ancillary Revenue.

Research conducted by IdeaWorksCompany for the report indicates that the global revenue generated beyond flight sales this year is likely to reach $36.1 billion.

When we consider that this impressive figure represents 5.4% of the projected global airline operating revenue for 2012, the vital importance of ancillary revenue to airlines’ financial health is clear. For airlines of all kinds, the revenue generated by providing passengers with a wide range of ancillary services is essential to safeguarding profitability.

Benefits and advantages of ancillary revenue

One of the main advantages of ancillary revenue from the perspective of the aviation industry is its resilience to common operational issues such as rising fuel costs and competitive ticket-pricing. Moreover, helping consumers to customise their journeys with optional extras such as travel insurance or ‘a la carte’ services is considerably less labour-intensive than many other airline activities.

The report estimates that the airlines championing ancillary revenue (for example, AirAsia, Allegiant Air, and easyJet) derive almost 20% of their collective operating revenue from services beyond the core movement of passengers from origin to destination. This group of airlines – known as the ‘Ancillary Revenue Champs’ – is expected to earn $5.5 billion in ancillary revenue in 2012 alone, a 30.5% increase on the amount earned last year.

The success of the Ancillary Revenue Champs highlights the significant commercial opportunity that ancillary services offer airlines across the globe. However the Amadeus-IdeaWorks Company report estimates that, on average, traditional airlines will obtain only 2.9% of revenue from ancillary sources in 2012, the same percentage as last year.

This suggests that a large number of carriers have the potential to expand their ancillary offerings. For instance, traditional carriers outside the US typically obtain only 10% of their ancillary revenue from ‘a la carte’ purchases such as special meals or priority boarding, leaving room for development.

Whereas the US majors achieve only 5% of their ancillary income from cross selling products like car insurance. Outside the US this cross-selling activity represents 30% of ancillary receipts, and considering the high margins it yields there appears to be a clear chance to capitalise for US airlines.

Opportunities abound for airlines of all kinds to increase profitability by embracing – and widening – their ancillary services.

In order to support the continued growth of ancillary revenue, airlines need to be able to offer the maximum number of ancillary services to the maximum number of customers: continued innovation and the universal adoption of a multi-channel, collaborative approach to ancillary services are crucial to realising this vision.

The importance of ensuring that optional extras can be purchased through travel agents, in addition to online and direct from the carrier, inspired the Amadeus Ancillary Services solution which 53 carriers have now signed contracts to implement.

EMDs not only make an important contribution to streamlining the provision of ancillary services but also make interline ancillary services a reality.

Today around 20% of bookings made through the Amadeus system are interline sales so it is essential carriers can enable their partner airlines to facilitate the sale and delivery of ancillary services. Partnership sales will become an increasingly hot topic in the ancillary debate as progress begins to be made. Egypt Air and Finnair provide an early example having established the world’s first interline EMD link using Amadeus technology.

Interestingly the report forecasts that airlines in regions such as Europe and Asia-Pacific will benefit from a significant increase in the amount of ancillary revenue they generate this year in comparison to 2011 (11.7% and 21.3% respectively).

When compared to growth of circa 4% in the US, we can see airlines in other regions beginning to catch-up with the lead established by US carriers.

By becoming more effective retailers, and giving passengers the ability to customise their journeys according to their individual preferences, airlines can significantly increase ancillary revenue.

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